Monday, March 16, 2009

Housing Affordability Hits Record Highs in Dec. and Jan.; Why Does The Media Ignore The Good News?

The National Association of Realtors (NAR) recently released its latest Housing Affordability Index (HAI), showing that housing affordability reached an all-time, historic record high of 166.8 in January (see chart above). A HAI of 166.8 would mean that the typical household earning the median family income of $59,821 in January would have 166.8% of the qualifying income to purchase a median-priced existing single-family house ($169,900) with a 20% down payment, which would be the highest level of housing affordability since the NAR started reporting housing affordability in 1971 (see chart below). Since mid-2006, the HAI has risen by more than 67 points, from 99.6 in July 2006 to 168.8. Stated differently, the annual qualifying income required to purchase a median-price house (with a 20% down payment) is only $35,856, with monthly payments based on a 5.21%, 30-year fixed-rate mortgage ($747.19 per month for principal and interest). Given the median family income of about $59,821, the typical family would have 166.8% of the income required to qualify for the mortgage to purchase the $169,900 home.The historic surge in housing affordability to a new record-high will play an important role in the real estate market's recovery, and I have reported on the huge increases in housing sales recently in California and Florida. Interestingly, the record-high level of housing affordability over the last several months has gone almost unreported by the media. The media seems trigger happy in its coverage of every possible bit of bad news about the real estate market and economy in general, but never covers some of the obvious, "mustard seed" signs of economic recovery, like record high housing affordability. Exhibit A: The constant reporting of the "worst _______ (unemployment rate, employment loss, unemployment claims, housing starts, housing sales, etc.) report in ______ years," but the failure to report historic highs for housing affordability in both December 2008 and January 2009. After all, home ownership is a critical part of the American Dream. Shouldn't we be celebrating the fact that owning a home is now more affordable than at any time in U.S. history?

11 Comments:

I for one am excited about current housing affordability. I suspect that MANY people in my generation (somewhat between X and Y) would be unable to afford homes unless they decrease to 2-3X average incomes or 100X monthly rents.

I suspect that the dramatic decrease in current prices mostly affects the baby boom generation in a negative way, hence the consistent negative reporting about decreasing house prices. But it is a boon to those of us who have been patiently waiting to houses to be more affordable.

There you go again with the NAR statistics. Just as a stock has PE, housing has price/rent ratio and it is still historically out of kilter. I still rent at 30% of the cost of owning the same space in the same neighborhood. Nothing has dramatically changed. Perhaps you need to do some real market investigation rather than rely on a completely discredited trade organization for your dubious facts.

Anon: There you go again using personal anecdotal evidence to attempt to discredit actual data on the national housing market. Do you have any price/rent ratios to share with us to help bolster your argument or are you just making things up to suit your negative outlook?

No idea... Conspiracy theories, anyone? However, I do think the good housing affordability is perfect for the "young" ones to invest in. It's not just the perfect time to buy a home for ourselves but also for investments like B&Bs and other home-based businesses.

2. Dubious facts? The HAI is based on three variables: a) the 30-year mortgage rate, b) the median priced home and c) median family income. A homebuyer with median family income ($59,800) currently has 1.668 times the qualifying income ($35,850) to buy a median priced home with a 20% down payment. What part of that is dubious?

To me this is a classic example of the difference between government control and free markets. In the case presented we see adjustments are being made by individuals who want to cash out and are therefore willing to accept less. Contrast that with the government taxing plans where if income in one area declines they then seek additional revenue from somewhere else in order for the total revenue to either remain the same or continue to increase.

Mark: You dont really expect Anon @ 10:30 PM to respond, do you? Cranks like that just throw rocks and hide. In any event, the data you cite is unassailable and it shows housing as being highly affordable at the moment. Now is an excellent time to buy.

Granted this is anecdotal evidence, but I just closed on a house last week. The house was flipped by a realtor, who made a nice profit on the job. A bad-looking house was made into a gem of the neighborhood. I got an awesome deal on an almost completely refurbished house in a good area for half the price of what my friends have paid. Then the icing on the cake: I'm paying less mortgage than I was in rent.

I can definitely believe this statistic. This is the way it should work though. We had a long time where affordability was very low, this is the natural response. I just feel sorry for the people who are stuck high and dry at tens of thousands of dollars in negative equity.